Sustaining fair shares: the Australian housing system and intergenerational sustainability

Sustaining fair shares: the Australian housing system and intergenerational sustainability National Research Venture 3: Housing affordability for lower-income Australians Research Paper No. 11 authored by Judith Yates, Hal Kendig and Ben Phillips with Vivienne Milligan and Rob Tanton for the Australian Housing and Urban Research Institute Sydney Research Centre RMIT-NATSEM Research Centre February 2008 ISBN: 1 921201 57 6

ACKNOWLEDGEMENTS This material was produced with funding from the Australian Government and the Australian States and Territories. AHURI Ltd gratefully acknowledges the financial and other support it has received from the Australian, State and Territory governments, without which this work would not have been possible. AHURI comprises a network of fourteen universities clustered into seven Research Centres across Australia. Research Centre contributions, both financial and in-kind, have made the completion of this report possible. The authors would like to thank Kylie Tobler and Tom Morrison for their assistance with this research. DISCLAIMER AHURI Ltd is an independent, non-political body which has supported this project as part of its programme of research into housing and urban development, which it hopes will be of value to policy-makers, researchers, industry and communities. The opinions in this publication reflect the views of the authors and do not necessarily reflect those of AHURI Ltd, its Board or its funding organisations. No responsibility is accepted by AHURI Ltd or its Board or its funders for the accuracy or omission of any statement, opinion, advice or information in this publication. PEER REVIEW STATEMENT An objective assessment of all reports published by carefully selected experts in the field ensures that material of the highest quality is published. AHURI employs a double-blind peer review of the full report where anonymity is strictly observed between authors and referees. i

CONTENTS LIST OF FIGURES... VI LIST OF TABLES... VIII ABBREVIATIONS... IX EXECUTIVE SUMMARY... 1 Methodology... 1 Key findings... 2 Policy implications... 3 1 INTRODUCTION... 5 1.1 Background and purpose... 5 1.2 Research objectives and key questions... 5 1.2.1 Key research questions... 6 1.3 Intergenerational sustainability and Australian housing... 6 1.3.1 Fiscal sustainability... 7 1.3.2 Housing sustainability... 7 1.3.3 A working definition of a sustainable housing system... 8 1.4 Report overview... 9 2 THE AUSTRALIAN HOUSING SYSTEM... 11 2.1 The development of the Australian housing system... 11 2.1.1 Home ownership... 11 2.1.2 Social rental housing... 13 2.1.3 Private rental housing... 14 2.2 Emerging market trends... 15 2.2.1 House prices increasing more rapidly than incomes... 15 2.2.2 Accessibility outcomes... 16 2.2.3 Declining home ownership rates... 18 2.2.4 Wealth polarisation... 20 2.2.5 Changing housing costs... 21 2.3 Drivers of change... 22 2.3.1 Structural factors... 22 2.3.2 Specific drivers of changes... 23 2.3.3 Housing policy drivers... 24 2.4 Summary... 25 3 MODELLING HOUSING SUSTAINABILITY... 26 3.1 The model... 26 3.1.1 STINMOD06A... 26 3.1.2 Ageing STINMOD06A... 28 3.2 Non-discretionary assumptions in ageing STINMOD... 28 3.2.1 National household projections... 28 3.2.2 Sub-national household projections... 29 3.2.3 Demographic ageing and household type... 30 ii

3.2.4 Housing policy settings... 31 3.3 Discretionary assumptions in base model... 32 3.3.1 Age-specific home ownership rates... 32 3.3.2 Other age-specific rental tenure rates... 33 3.3.3 Base model assumptions for rent, housing costs... 34 3.4 Implications of IGR assumptions... 35 3.4.1 Implications of IGR assumptions for house prices... 35 3.4.2 Implications of house price assumptions for rents and tenure... 35 3.5 Scenarios... 36 3.5.1 Tenure changes... 36 3.5.2 Real income and real rent changes... 37 3.5.3 Real housing cost changes... 37 3.6 Summary of outputs... 38 3.6.1 Summary of variables employed... 38 3.6.2 Housing system sustainability... 39 3.6.3 Fiscal sustainability of current housing assistance system... 39 4 CORE FINDINGS... 41 4.1 Housing sustainability: headline results... 41 4.2 Housing sustainability: specific results... 43 4.2.1 Tenure outcomes... 43 4.2.2 Housing stress by tenure... 44 4.2.3 Housing stress by age... 45 4.2.4 Housing stress by household type... 46 4.2.5 Housing stress by region... 46 4.3 Drivers of results... 48 4.4 Fiscal sustainability... 50 4.4.1 Impact on CRA... 50 4.4.2 Impact on FHOG... 50 4.4.3 Net effect on fiscal sustainability... 51 4.5 Summary of core results... 51 5 SENSITIVITY ANALYSES... 53 5.1 Housing sustainability... 53 5.1.1 Summary of scenarios... 53 5.1.2 Scenario results for all households and all lower income households... 54 5.1.3 Scenario results by household characteristics... 56 5.1.4 Summary... 59 5.2 Fiscal sustainability... 60 5.3 Summary... 61 6 CONCLUSIONS AND IMPLICATIONS... 62 6.1 Introduction... 62 6.2 Assessing the projections... 62 iii

6.2.1 Housing sustainability and the Intergenerational Reports... 62 6.2.2 Interpreting the projections... 63 6.2.3 Projections, not predictions... 64 6.3 Implications for intergenerational sustainability of housing... 64 6.3.1 Housing stress... 64 6.3.2 Access to home ownership... 65 6.3.3 Housing wealth... 66 6.3.4 Public rental housing... 67 6.3.5 Private rental housing... 67 6.3.6 Vulnerable groups... 67 6.3.7 Fiscal sustainability... 68 6.4 Policy directions for intergenerational sustainability... 69 6.4.1 The challenge ahead... 69 6.4.2 Home ownership policies... 69 6.4.3 Public rental policies... 70 6.4.4 Affordable rental policies... 70 6.4.5 Broader-based policies... 71 6.5 Improving future Intergenerational Reports... 72 6.6 Conclusion... 73 REFERENCES (STYLE: NON INDEXED HEADING 1 )... 74 TECHNICAL APPENDIX A: MODEL INTERACTIONS... 81 A.1 Overview... 81 A.2 Interactions affecting model assumptions... 81 A.2.1 Intra-generational interactions... 81 A.2.2 Intergenerational interactions... 82 A.2.3 Interdependencies between key variables... 84 A.3 Impact of demographic change on key economic variables... 84 A.3.1 Demographic change and house prices... 84 A.3.2 Demographic change and interest rates... 85 A.3.3 Demographic change and incomes... 86 A.4 Interactions between key economic variables... 86 A.4.1 Housing demand and supply... 86 A.4.2 Dwelling prices, interest rates and rents... 87 A.5 Summary... 88 TECHNICAL APPENDIX B: MODEL ASSUMPTIONS... 90 B.1 Overview... 90 B.2 Key assumptions in IGR... 90 B.2.1 Demographic assumptions... 90 B.2.2 Economic assumptions... 90 B.3 Key model assumptions not covered by the IGR... 92 B.3.1 Interest rates... 93 iv

B.3.2 Past house price trends... 95 B.3.3 Future house price trends... 97 B.3.4 Past trends in rents... 98 B.3.5 Future rent trends... 101 B.3.6 Future housing cost trends... 101 v

LIST OF FIGURES Figure 2.1: Nature of occupancy, 1947 2006... 12 Figure 2.2: Real house prices and household income per household, 1960 2006... 16 Figure 2.3: Deposit gap measure of housing accessibility, 1960 2006... 17 Figure 2.4: Home ownership rates for younger households, 1971 2006... 18 Figure 2.5: Tenure by age, 1961 and 2001... 19 Figure 2.6: Household net worth by age of reference person and tenure, 2003 2004... 20 Figure 2.7: Average housing cost as a proportion of household income, Australia, 1975/76 to 2003/04... 21 Figure 2.8: Factors affecting affordability... 22 Figure 3.1: Household projections by age... 29 Figure 3.2: Household projections by state... 30 Figure 3.3: Projections by household and family type... 31 Figure 4.1: Number of households in housing stress... 42 Figure 4.2: Proportion of households in housing stress... 42 Figure 4.3: Assumed age-specific tenure outcomes, 2006 2045... 43 Figure 4.4: Nature of occupancy: past and projected... 44 Figure 4.5: Housing stress by tenure... 45 Figure 4.6: Housing stress, all households by age... 45 Figure 4.7: Housing stress, all households by household type... 46 Figure 4.8: Housing stress, all households by region... 48 Figure 4.9: Projected real expenditure on CRA... 50 Figure 4.10: Projected real expenditure on FHOG... 51 Figure 5.1: Scenario results proportion of households in housing stress... 55 Figure 5.2: Scenario results proportion of households in housing stress by tenure 57 Figure 5.3: Scenario results proportion of all households in housing stress by age 58 Figure 5.4: Scenario results: proportion of all households in housing stress by household type... 59 Figure 5.5: Scenario results for FHOG expenditure ($ 2006)... 60 Figure 5.6: Scenario results for CRA expenditure... 60 Figure A.1: Potential interactions between spatial, socio-economic and housing change... 81 Figure A.2: Potential interactions between spatial, socio-economic and housing change across generations... 83 Figure B.3: Rents and CPI, 1970-2006... 98 Figure B.4: Dwelling rents ($2006)... 99 vi

Figure B.5: Selected gross rental yields for selected Australian capital cities... 100 vii

LIST OF TABLES Table 2.1: Access to home ownership based on AWE: 1951 2006... 17 Table 3.1: Household projections by state... 30 Table 3.2: Current and projected age-specific home ownership rates... 32 Table 3.3: Key economic assumptions in base model... 34 Table 4.1: Housing stress, all households by region... 47 Table 4.2: Contributions to housing stress by demographic characteristics, 2006 2045... 49 Table 5.1: Scenarios... 53 Table 5.2: Scenario results proportion of households in housing stress... 54 Table B.1: IGR1 economic assumptions... 91 Table B.2: Low/high growth scenarios for real GDP... 92 Table B.3: Real and nominal interest rates and inflation: 1960-2005... 94 Table B.4: Median house prices, various regions: June 2001... 97 viii

ABBREVIATIONS ABS AWE AWOTE CSHA CPI CRA FHOG GDP IGR NATSEM NRV OECD PC RBA SIHC WCED Australian Bureau of Statistics Average Weekly Earnings Average Weekly Ordinary Time Earnings Commonwealth State Housing Agreement Consumer Price Index Commonwealth Rent Assistance First Home Owners Grant Gross Domestic Product Intergenerational Report National Centre for Economic and Social Modelling National Research Venture Organisation for Economic and Social Development Productivity Commission Reserve Bank of Australia Survey of Income and Housing Costs World Commission on Environmental Development ix

EXECUTIVE SUMMARY This report was motivated by the omission of any consideration of housing in either of the Intergenerational Reports (IGRs) released in Australia in 2002 and 2007 (Commonwealth Treasury, 2002, 2007). Those reports examined the fiscal implications of an ageing population. This report writes the missing housing chapters. It examines the intergenerational sustainability of Australia s system of housing assistance over the next 40 years the same time period covered by the Intergenerational Reports under assumptions consistent with those made in those reports. At the same time, it broadens the IGRs examination of sustainability (limited to fiscal sustainability for the Australian government) by looking more broadly at the intergenerational sustainability of Australia s housing system. Sustainability means the needs of the present generation can be met without compromising the ability of future generations to meet their own needs. For housing, sustainability is defined in terms of the ability of the current system of housing provision to prevent any increase in housing stress that is, in the proportion of households who are paying 30 per cent or more of their incomes on housing with a focus on lower-income households. For the system of housing assistance, sustainability is defined in terms of the ability to maintain the current policy settings without any increase in demands on government expenditure, consistent with the definition of fiscal sustainability that means all obligations, current and future, can be met without changing current policy settings. To provide a context for considering the future of the Australian housing system, chapter 2 of the report provides an overview of the Australian housing system as it has developed during the post WWII era. This charts the rise of home ownership and public housing, and the market and policy forces underlying these developments. It shows that home ownership for younger households has declined systematically since the mid-1970s. In contrast, older households are increasingly outright home owners or public tenants. Housing costs as a proportion of incomes have been rising since the early 1980s. Chapter 2 identifies the key drivers affecting affordability, including dwelling prices, interest rates and household income. Methodology Intergenerational sustainability for housing and housing assistance is determined by modelling the impact of potential changes in tenure and housing costs in relation to household income. Chapter 3 provides a full account of the model used in this report to make projections of housing stress outcomes and future levels of government expenditure on housing. The modelling used NATSEM s STINMOD, a micro simulation model of Australia s tax and transfer system. This model is benchmarked on data from the ABS Survey of Income and Housing Costs in 2000/01 and 2002/03. The data was up-rated to 2006 using a standard set of inflators, and by applying changes in the tax/transfer system that occurred from 2002/03 to 2006. To produce the base case results for this project, the data in the model was aged from 2006 to 2025 and 2045 using demographic assumptions consistent with those made in the Intergenerational Reports. Housing costs and household incomes in the survey data also were projected to 2025 and 2045 in line with assumptions made in the first IGR (IGR1) about key economic indicators (such as GDP and inflation). The second IGR (IGR2), with its updated assumptions, was released after the analysis for this report was completed. 1

Specific assumptions about the future pattern of housing tenure in Australia were necessary to enable projections to be made about what will happen to housing stress levels and housing expenditure. The baseline model used in this study makes conservative assumptions built on longer-term housing trends rather than recent rapid rises in housing costs. The assumption made about housing tenure in the baseline model is that there are no further declines in home ownership rates among the young and that the incremental catch-up as they grow older is the same as has occurred in the past. Six alternative scenarios explored the sensitivity of the findings to different assumptions about housing costs, tenure change and wages growth in the future. Key findings Both the number of households in Australia and real household income per household are projected to continue to increase over the next 40 years. As a result of the combined impact of these trends, the gap between house prices and incomes is likely to continue, with no improvement in housing affordability. Along with a number of social changes already in place (such as later partnering, more single-parent and single-person households) and those projected to occur in the future (as a result of an ageing population), this means the current low levels of home ownership rates among younger households are likely to be the same or lower in the future. It also means it will be increasingly difficult for low- and moderate-income households who have deferred home purchase to become home owners before they retire. These households will remain in the private rental market where, in the baseline model, future rents are assumed to increase in line with real household incomes. The key findings from the baseline modelling undertaken for this report show that over the 40 years to 2045: The total number of households in Australia is projected to increase by 50 per cent (from 8.1 million in 2006 to just over 12.1 million in 2045). The number of households in housing stress defined as housing cost to income ratios of at least 30 per cent is projected to increase by 77 per cent (or 18,500 households per year). The number of lower-income households in housing stress is projected to increase by 84 per cent (or 13,500 households per year). These effects are projected to be most severe in the private rental market: Over the next 40 years, the total number of households in the private rental market in Australia is projected to increase by 80 per cent (from 1.8 million in 2006 to 3.3 million in 2045). The number of lower-income households in housing stress in the private rental market is expected to increase by 120 per cent (or 12,000 households per year) over the next 40 years. The incidence of housing stress among lower-income households in the private rental market is expected to increase from 52 per cent to 65 per cent over the next 40 years. Programs of housing assistance considered in the study are found to be on the borderline of being fiscally unsustainable: Real expenditures on Commonwealth Rent Assistance (CRA) are projected to increase by 170 per cent from less than $2 billion in 2006 to over $5 billion in 2045 (measured in 2006 dollars). Over the same period, IGR1 predicts real GDP to increase by 121 per cent. As a percentage of GDP, CRA expenditure as a proportion of GDP is projected to increase by 23 per cent from a relatively 2

Combined housing expenditures on the two key direct housing assistance programs covered in this report (CRA and First Home Owners Grant) are expected to increase in real terms by 50 per cent over the next 40 years. As a percentage of GDP, the combined housing expenditures decrease from 0.31 per cent of GDP in 2006 to 0.27 per cent in 2045. While these specific results are sensitive to the particular assumptions made about key variables, the broad conclusions drawn from them are robust to a range of alternative assumptions about the same variables. These results can be found in more detail in chapter 4, while the results of the sensitivity analyses are reported in chapter 5. The results and the supporting sensitivity analysis are unequivocal. Unless major, unanticipated economic, social or policy changes emerge, Australia s current housing system and its system of rental assistance are unsustainable according to the definitions of sustainability given above. Australia s current system of housing assistance based on its two key direct housing assistance programs is fiscally sustainable only if the support for first home owners continues to decline in real terms, as projected in this report. Overall, in the future as in the past, the majority of Australians will have affordable, secure housing over their lives. However, over the next 40 years there will be an increasing number and an increasing proportion of households in the private rental market in housing stress. This will occur despite a significantly higher burden being placed upon the public purse of the current rental assistance system. From intergenerational sustainability and equity perspectives, the main question is how to ensure fair shares of housing for all Australians. Policy implications Chapter 6 discusses the wider implications of this research. The key policy question posed is: What can be done over the coming decades to ensure future generations have the housing opportunities that have been available to current generations? The pattern of results projected for 2025 and 2045 shows that the extent of housing affordability problems is likely to grow over that period. This highlights the risks to government and society of not addressing the sustainability of the housing system in the next decade. Policies to improve housing affordability for first home buyers and lower-income renters will be critical to reverse the downward trend in home ownership among the present generation of young adult households, and to offset the impact of the projected large numbers of ageing renters in housing stress upon the cost of housing, income support and institutional care programs. The findings indicate the importance of maintaining and improving existing housing policies especially Commonwealth Rent Assistance, assistance for marginal home buyers, and funding under the Commonwealth State Housing Agreement sufficient to sustain the existing system of public housing to prevent the projected increase in housing stress. Alongside these measures, stronger policy action needs to be directed towards increasing the existing supply of affordable housing to further contain housing stress and to improve intergenerational equity. This would include: Building additional low-cost housing suitable for first home buyers. In particular, this strategy would help to ensure that the next generation continues to share the benefits of home ownership. It would also improve the effectiveness of present (and proposed) subsidies to home buyers and reduce the pressures on house prices that such subsidies tend to have otherwise; 3

Investing in additional public housing or, alternatively, introducing incentives for private investment in affordable rental housing that can be secured for long-term use by lower-income households; and Having an integrated program of public, not-for-profit and private housing to provide an increased range and number of independent living units to meet the projected growth in older renters, who are both in housing stress and at risk of requiring more expensive institutional care as their frailty increases. Other broader policy actions are essential to complement housing assistance measures to achieve intergenerational sustainability of the Australian housing system in the long term. The most far-reaching measures would involve reform of taxes and charges applying to residential land and housing to provide for more equitable outcomes for future generations, and to promote greater equity within generations, especially between owners and renters. A second example would be to ensure that emerging policies to improve environmental sustainability are designed so they do not have adverse effects on housing affordability for future generations and vulnerable groups. Thirdly, regional development policies could be directed at taking the pressure off capital city housing markets and providing more housing choices by encouraging growth in well-endowed regional areas. Overall, this study has reinforced the concerns about achieving fair shares in housing in Australia that have been expressed over the past generation and earlier. Intergenerational inequalities in housing are likely to increase substantially unless major, ongoing changes are made to housing-related policies. The findings demonstrate that in order to be attentive to intergenerational sustainability and fairness in Australia, analyses and actions must give housing a central place. 4

1 INTRODUCTION 1.1 Background and purpose Housing is one of the cornerstones of the Australian way of life. The home provides shelter and a base for family, social and leisure activities. Its location affects access to work, shopping, and educational and community facilities. The cost of housing can have a crucial bearing on standard of living and, in turn, the housing industry is one of the key drivers of employment and economic growth. Government is closely linked to housing not only through provision of housing assistance to first home owners, and public and private tenants, but also more broadly through taxation, regulation and fiscal policies. Since Australia began its recovery from the World War II there have been ongoing improvements in housing along with economic growth. In the immediate post war period, the stock of both private and public housing grew rapidly and home ownership rates rose substantially. From that time until the present, the quality and size of housing increased steadily and increasing housing values have generated substantial wealth for many home owners and investors. Over recent decades, however, house prices have grown faster than incomes, and housing is becoming less affordable for many households. First-time buyers have delayed entry to home ownership, public housing has declined and the private rental sector is not meeting the needs of lower-income households. There is increasing concern that access to housing, and its benefits enjoyed by the post-war generations, may be reduced for future generations of Australians. The number of Australians who cannot afford their own homes or gain access to public housing is increasing and could increase appreciably more. This report examines the intergenerational sustainability of the Australian housing system. It was motivated by the absence of housing or housing policy in either of the Australian Government s Intergenerational reports (IGR1 and IGR2) (Commonwealth Treasury, 2002; Commonwealth Treasury, 2007), notwithstanding housing s potential importance for intergenerational sustainability. This report aims to fill this major gap in information concerning public and policy choices ahead for housing in Australia by providing an intergenerational report for housing. It examines the implications of current housing trends on the housing opportunities available to future generations. It has been undertaken in conjunction with AHURI s National Research Venture 3: Housing Affordability for Lower Income Australians (NRV3) and builds on NRV3 research results. This first chapter begins with the key research questions identified for this project. It follows with a discussion of the key concepts in intergenerational sustainability of housing, and indicates how these are interpreted for the purposes of this report. The chapter concludes with an overview of the approach taken by the research and an outline of the report s structure. 1.2 Research objectives and key questions The broad purpose of the research is to anticipate possible futures in order to inform future public policy choices for Australian housing. While popular housing debates understandably focus on immediate concerns, this research looks further ahead to the longer term: specifically, over two periods of 20 and 40 years. It is important to emphasise that the research findings are based on projected scenarios rather than predictions of the future. Indeed, public and government responses to the projected 5

scenarios may stimulate policy changes that could improve housing outcomes during and beyond the period covered by this report. 1.2.1 Key research questions The key research questions addressed in this report are as follows: 1. What is meant by intergenerational sustainability and equity in relation to the Australian housing system? 2. What features of the Australian housing system have affected intergenerational sustainability and equity over the past 50 years, at present, and in projections to 2025 and to 2045? 3. What implications do changes in direct and indirect government housing assistance have for the standard of living of people at different stages of life, especially vulnerable groups? 4. Are current forms of housing assistance sustainable under different scenarios of economic and social change and policy choices? The first of these questions is addressed below. 1.3 Intergenerational sustainability and Australian housing The concept of sustainability has its origins in the 1987 United Nation s World Commission on Environmental Development (WCED) report, Our Common Future, (commonly known as the Brundtland report, after its chair). In this report, sustainable economic development was defined as: development seeking to meet the needs of the present generation without compromising the ability of future generations to meet their own needs. (WCED: 1987, p. 49) By definition, therefore, sustainability is inherently a concept that involves intergenerational issues. It is predicated on a concern with equity across generations. Chiu adds just one word, to define sustainable housing development as: development that meets the housing needs and demands of the present generation without compromising the ability of future generations to meet their needs and demands (Chiu, 2004, p. 65) This original definition reflected a concern with the earth s capacity to meet the demands being made on its limited environmental resources by expanding needs and wants. Over time, definitions have broadened from environmental concerns to incorporate the triple bottom line of economic, social and environmental concerns, recognising that these are interrelated and that the need to take all into account can require trade-offs between them. For example, environmental considerations can involve economic costs that fall unevenly on social groups and translate into substantial social costs and accentuate inequalities. Decision-making is made more complex when triple bottom line criteria apply to issues that have long-lasting repercussions, and hence are significant for intergenerational equity. However expressed, the broad concept of intergenerational sustainability that underpins increasing public concern is that future generations may have fewer lifelong benefits than do current and past generations. A concern with intergenerational sustainability is, by definition, a concern with intergenerational equity. In terms of housing, it implies that future generations enjoy the same housing standards and opportunities as do current and past generations. 6

1.3.1 Fiscal sustainability In Australia, the concept of intergenerational sustainability was brought to the fore by the Treasurer s landmark Intergenerational Reports (IGR1, 2002; IGR2, 2007). These focused explicitly on the major challenges presented to the fiscal sustainability of the Australian Government by the implications of demographic change associated with the ageing of the population. A Treasury definition of fiscal sustainability is that all obligations, current and future, can be met without changing current policy settings (McKissack and Comley, 2005: fn3, p. 2). Intergenerational equity is interpreted as fairness in the distribution of public resources between generations of Australians (IGR1, p. 14). Attempts to achieve intergenerational equity are assumed to have failed if the cost of paying for the lifestyle of the current generation is transferred to future generations. In other words, fiscal sustainability is understood to imply that present generations do not impose budgetary burdens on future generations, thus requiring them to bear higher tax burdens than the current generation. Thompson (2003) suggests that these concepts of intergenerational equity and sustainability can be philosophically and economically contested. She provides an analysis of the basic assumptions in the Intergenerational Report and an overview of some of the major competing views about social justice and obligations of present generations to future generations. For example, the IGR report assumes that future generations will have further higher real incomes, which suggests that they will have a greater capacity to pay for government services. Further, expenditure by current generations can benefit future generations as well as their own. This applies with particular force to expenditure on housing capital and environmental protections that will have benefits far into the future. She concludes that the goal of preserving the next generation s well-being seems best underwritten by a fair outcomes approach to justice and suggests that, as such, it implies that the distribution of resources among members of each generation should also be a major concern of policy makers. The National Strategy for an Ageing Australia (Andrews, 2002) and later the Productivity Commission (PC) (2005) provide a more comprehensive analysis of population ageing and sustainability. They acknowledge the economic and fiscal issues while pointing out the productive opportunities presented by an ageing population and the positive actions that can mitigate the costs of population ageing. These reports underscore growing recognition that planning, investment and constructive change are essential to maintaining standards of living and quality of life for future generations. Concerns for economic and fiscal sustainability arise within broader concerns for environmental sustainability. 1 1.3.2 Housing sustainability Issues of intergenerational sustainability apply with particular force to housing and the built environment. Land and residential development are expensive, enduring investments that affect successive residents and broader populations far into the future. The pervasive consequences include the adequacy and amenity of accommodation, environmental and social costs generated by transport patterns, and ongoing private and public costs in servicing debt and maintaining investments. Households are sensitive to the price of new housing and this affects the overall housing market. At the same time, the environmental sustainability of housing and 1 The sustainability of Australian cities also has been raised as a major public issue by the House Standing Committee on Environment and Heritage (2005). The environmental imperatives to conserve energy and land confront Australian s long standing attachment to private cars and large homes on suburban blocks. 7

communities can be improved more cost effectively at the time of the initial investment. Triple bottom line decision making is essential for government action concerning land use and building controls, investment in roads and other infrastructure, and direct and indirect housing assistance for individuals and families. In the UK, the concept of sustainability is being applied in national housing and urban policy. In its five-year plan, which focused on the role of housing in creating sustainable communities, the (then) Office of the Deputy Prime Minister (ODPM) claimed that: A flourishing, fair society based on opportunity and choice for everyone depends on creating sustainable communities places that offer everyone a decent home that they can afford in a community in which they want to live and work, now and in the future (ODPM, 2005a, p. 5). In a paper prepared for an inquiry into the future of home ownership, Meen (2005) discusses alternative concepts of sustainability in the context of sustainable home ownership. His most important conclusion is the recognition that sustainability cannot be considered in isolation from underlying economic and social conditions. He makes a number of key points: Future owner-occupation rates cannot be considered as an extrapolation of past trends because market conditions can change. Environmental concepts are not directly applicable to housing. While housing generates environment problems such as pollution and congestion, land itself can only change in its use and it is not used up in any direct sense. In sustaining home ownership we need to consider the ongoing costs of maintenance and repair associated with physical deterioration. Sustainability needs to be considered in the context of underlying economic trends as they influence housing markets, with consequences for affordability for households and profitability for builders and landlords. From a broader social perspective, it is important to consider how home ownership can contribute to social capital in any community, for example, by enhancing the stability of local neighbourhoods. (Meen, 2005, p. 10) Together these points highlight the potential complexities of operationalising definitions of a sustainable housing system, even when this is constrained to owneroccupation as just a part of the whole housing system. The concept of sustainability of the housing system in this report is not based on an assumption of primacy of owner-occupation. It is based, instead, on the relationship between housing costs and household incomes. 1.3.3 A working definition of a sustainable housing system This report addresses two aspects of sustainability in relation to the housing system: Housing sustainability that applies to the housing system and the capacity of successive generations to gain access to appropriate, affordable housing; and Fiscal sustainability as it applies to the housing assistance system. In relation to the former, the assumption made in this work is that the key to a sustainable housing system lies in ensuring that acceptable housing remains affordable both at the point of a household s initial entry into the housing market, and sustained over its lifetime. For housing, sustainability is defined in terms of the ability of the current system of housing provision to prevent any increase in housing 8

stress that is, in the proportion of households who are paying 30 per cent or more of their incomes on housing, with a focus on lower-income households. This operational definition is consistent with the points raised by Meen and is consistent with the conceptual definitions provided above. It makes no assumptions regarding how sustainability is determined by tenure, but tenure outcomes will have a significant impact on whether a specific set of economic and social trends are likely to result in a sustainable housing system with particular housing policies. The significance of tenure arises because the housing cost to income ratio tends to decrease for home owners as they age (and as they pay off their mortgage). For private renters, however, it is likely to increase if there is a fall in household income after retirement. In assessing housing sustainability the report is based on the following assumptions: market forces will (continue to) dominate housing outcomes; and affordability is defined by the 30/40 rule; that is, housing is affordable if households pay no more than 30 per cent of their income to cover their housing costs, and the primary concern is with households in the lowest 40 per cent of the income distribution. While the definition of sustainability is not tenure dependent, the primary focus in the modelling undertaken is on housing affordability for home purchasers and for private tenants, since it is in these two tenures that households are most likely to experience affordability problems. This report focuses on the housing outcomes of successive cohorts moving through periods of history. The key analytical questions concern the differential impact of housing and policy on people at particular stages of the lifespan at each of the three periods of history: 2006, 2025 and 2045. The time between these periods approximates roughly to a generation and broadly defines key life stages. The fiscal sustainability aspect of housing sustainability is addressed in a manner consistent with the approach undertaken in the IGRs. It examines the cost to government of housing assistance for the same three periods under the assumption that current policy settings remain unchanged. 1.4 Report overview This first chapter has presented the research questions and key concepts that have guided the research on the intergenerational sustainability of Australian housing. It has raised the social equity and public policy context for modelling scenarios for the future of Australian housing. Chapter 2 provides an overview of the Australian housing system as it has developed over the post-wwii era. It charts the rise of home ownership and public housing, and the market and policy forces underlying these developments. It shows that home ownership for younger households has declined systematically since the mid-1970s. In contrast, older households are increasingly outright home owners or public tenants. Housing costs as a proportion of incomes have been rising since the early 1980s. The chapter identifies the key drivers affecting affordability, including dwelling prices, interest rates and household income. Chapter 3 outlines the modelling approach taken to develop scenarios for housing tenure and affordability to 2025 and then to 2045. The modelling was based on NATSEM s STINMOD, a micro-simulation model of Australia s tax and transfer system. This is based on data from the ABS Survey of Income and Housing Costs (SIHC) 2000/01 and 2002/03 and up-rated to 2006 using a standard set of inflators 9

including CPI and Average Weekly Earnings, and applying changes in the tax/transfer system from 2002/03 to 2006. The resultant model, STINMOD06A, was then aged from 2006 to 2025 and 2045 by adjusting the household weights in the SIHC data so that the resultant data sets had characteristics that matched ABS household projections (to 2025) and Productivity Commission projections (to 2045). These are consistent with population projections in the Treasurer s Intergenerational Reports. A cohort trajectory method was employed to project housing tenure for 10-year age groups to 2025 and then to 2045. In the baseline model, housing costs and income in the survey data were projected to 2025 and 2045 according to assumptions consistent with those employed in the IGR. In consultation with the Project User Group, alternative scenarios were developed to explore the sensitivity of the results to different assumptions about tenure, income and housing costs for the future. Two technical appendices related to the modelling are included with this report. Appendix A discusses the interactions between the demographic and economic variables that affect housing costs and housing outcomes and provides a rationale for the assumptions made about these outcomes in the base model. Appendix B provides a historical overview of past trends in these key variables and highlights their impact on assumptions made about future trends affecting housing market outcomes. Chapter 4 presents findings from the baseline model and Chapter 5 present results from the additional scenarios. These chapters present these key housing outcomes for households at different life stages, income levels and geographical areas. In both chapters tenure projections and housing costs from the modelling are shown for 2025 and 2045. Housing sustainability is reflected in the proportion of households with housing costs in excess of 30 per cent of income, with a particular focus on households in the lowest 40 per cent of the income distribution. These households are defined as being in housing stress. Chapters 4 and 5 also outline how the fiscal sustainability of the current housing assistance system would be affected by projected changes in housing tenure and costs. STINMOD06A enabled estimation of the cost to the Commonwealth Government of continuing two of its primary interventions in the housing market Commonwealth Rent Assistance (CRA) and the First Home Owner Grant (FHOG). Projections were not made for expenditure under the Commonwealth State Housing Agreement because CSHA expenditure is not based on any formulaic basis (as is CRA or FHOG). However, the scenarios assume that, in the absence of a major policy change, there would be no increase in the absolute number of public and community housing tenancies. Chapter 6 interprets the findings in terms of projected pressures upon the intergenerational sustainability of the Australian housing system. It suggests that unless new directions are taken in government policy, the core stability underlying Australian housing in terms of home ownership, public housing and affordable housing costs is likely to be strained significantly. A continuing reduction in access to home ownership and public housing would see large numbers of households entering their middle and later years at high risk of housing stress. The adverse consequences of more pressure in the Australian housing system are likely to emerge most among low-income private tenants in all age groups. Chapter 6 considers the broader implications of these possible changes as well as illustrative policy options that could better sustain Australian housing for future generations. 10

2 THE AUSTRALIAN HOUSING SYSTEM This chapter provides a brief account of the evolution of the Australian housing system from its post-wwii development to its present manifestation. It is important to understand this history because investment in housing and patterns in its occupancy evolve over decades, with enduring consequences for successive generations. Australian housing today reflects earlier eras of immediate post-war relief of housing shortages, improvements to older housing that had deteriorated during the Depression and the war, massive suburban development of new homes, and the infill of newly built flats. The public sector has been integral to these developments, not only in the construction of government housing but also in land use regulation, urban infrastructure investment, macro-economic policy, and subsidies for younger people to buy homes or for low-income tenants to pay rent. Understanding this history helps us to appreciate that in the decades ahead, private and public sector action will in turn be setting the legacies for Australian housing for the rest of this century and beyond. The system of housing provision in Australia is dominated by market provision of housing. The tenure of housing is of particular importance given its centrality to occupants security and control over their homes, their costs of housing, and their accumulation of assets. At the 2001 Census, around 70 per cent of private dwellings were occupied by owners (both with and without a mortgage) and around 25 per cent were occupied by households paying rent to a private landlord or living rent free. Households paying rent to a public or not-for-profit landlord occupied the remaining 5 per cent of dwellings. Similar results hold for the 2006 Census. 2 This chapter provides a historical review of the major factors, including government policy, that have contributed in Australia to the rise of home ownership and changes in private and pubic tenancies. It also identifies relatively recent new directions in housing patterns, including a short analysis of what might have driven these changes, and highlights the implications of these changes. It is a selective overview. A more comprehensive review can be found in Milligan (2003). 2.1 The development of the Australian housing system 2.1.1 Home ownership Home ownership in Australia grew rapidly in the immediate period following WWII, reaching its current level of around 70 per cent by 1961, with home ownership then, and now, being the preferred tenure of both renters and owners (Wulff, 1993). As Badcock and Beer (2000) have argued, there is nothing preordained about the emergence of home ownership as the dominant tenure. Its post-war growth occurred during the long boom of the 1950s and 1960s when economic and demographic factors combined to generate a period of unprecedented economic growth and at a time when there was a severe post-war housing shortage. Bourassa et al. (1995) suggest that these factors, combined with the effects of rent control that limited building for private rent, meant home ownership was the only viable alternative for households unable to access government rental housing. The willingness of these 2 Tenure data used in this report are derived from census data on occupied private dwellings, excluding visitor only and not classifiable households (because no household data are available for such households to provide the cross-classification by age employed in the research). In the data reported, rent-buy is included with purchase data; rent not stated is included in the private rent category and rent free is included in the residual other tenure category. Tenure not stated is allocated pro-rata across all tenures. In 1961 and 1991, data for other tenure types (including rent free) were combined with not stated data. In 1966 and 1971, owner and purchaser data were combined. Prior to 1991, no data were collected on rent-buy schemes or other tenures. 11

households to borrow to finance their access to home ownership was underpinned by low interest rates, and secure and rising incomes generated by strong economic growth and associated low unemployment (Paris, 1993). Their ability to use borrowed funds to gain access to home ownership was underpinned by house prices that, for most households, were affordable in relation to incomes (as shown in Table 2.1 later in this chapter). Figure 2.1: Nature of occupancy, 1947 2006 80 % of households 60 40 20 0 1947 1954 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Owned: outright + being purchased Rented: private Rented: public Source: 1961, special request tabulations from census data; prior to 1961, Social Indicators Australia 1992. ABS Catalogue 4101.0. Public-private split for 1947 rental data estimated. Residual Other tenure type not charted. Home ownership has been supported both implicitly and explicitly by government policies. In order to overcome post-war housing shortages, the central government stimulated housing construction through its influence on the supply and cost of mortgage finance. In negotiation with the states, a new funding agreement entitled the 1945 Commonwealth State Housing Agreement (CSHA) was also announced. While the first Agreement delivered funding solely for the provision of public housing (with working families and returned soldiers the intended targets), the second directly supported the expansion of home ownership by providing mortgage finance at a subsidised rate of interest, and by permitting the sale of public housing to sitting tenants on extremely favourable terms. Ongoing war service home loans provided loans on similar terms to past and present defence service personnel. By 1965, direct government lending represented 34 per cent of housing loans outstanding in Australia (Milligan, 2003). Additional direct assistance was provided primarily through a variety of deposit assistance programs targeted at marginal first home buyers, often accompanied by state government rebates on stamp duties (Dalton, 2001). Such assistance, however, was suspended in 1990 with the cessation of the First Home Owner s Scheme, the last in a long series of deposit assistance schemes dating back to the 1960s. The withdrawal of Commonwealth-funded assistance occurred at a time when the first concerns were beginning to be expressed about the sustainability of the high home ownership rates observed since 1961, as will be discussed below. Direct assistance 12